Crude swaps may put another crack in export wall

By Jennifer A. Dlouhy

July 8, 2014

Photo: JOHN DAVENPORT, Staff

Energy companies eager to get the light, sweet crude from Texas' booming oil fields onto foreign markets are looking into whether swapping it for heavier foreign oil might fall within the constraints of a longstanding U.S. ban on most crude exports. (John Davenport/San Antonio Express-News)

Energy companies eager to get the light, sweet crude from Texas'...

WASHINGTON - Energy companies are looking closely at another way to export some of the crude pouring out of Texas wells, despite a long-standing ban on selling U.S. oil overseas.

Fresh from winning approval to export processed condensate, they now are seeking government approval to exchange U.S. crude for foreign oil.

The tactic is another way oil companies can work within the 39-year-old export ban to find new foreign customers for light, sweet U.S. crude beyond the domestic refineries that currently are ill-suited to process it.

A leading Republican senator has argued in favor of such exchanges, and Oklahoma City-based Continental Resources has asked the Obama administration to approve one such transaction. But oil companies and traders interested in the deals must overcome major market and regulatory obstacles that make them difficult.

Jacob Dweck, a partner with the Sutherland, Asbill & Brennan law firm who represents many companies in the oil-export space, said swaps of crude exports for equal imports of oil into the U.S. are a possibility under current rules and "the government may well show reasonable flexibility in granting them."

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"Because swap licenses are reviewed on a case-by-case basis, they provide the administration with latitude to examine then-current market conditions in determining whether to allow an export, including oil price and the balance between U.S. production and domestic capacity to refine it," Dweck said.

The flexibility for regulators and the potentially low profile of such crude exchanges could be a political asset for the White House, which is viewed as wary of wading deeper into the politically charged debate over oil exports before the November elections.

Exceptions

The existing ban on crude exports already makes exceptions for oil sent to Canada and supplies from Alaska and California. For example, Valero Energy Corp. holds a government license to send Eagle Ford crude from Texas to its refining operations in Canada.

Refined petroleum products, including gasoline, diesel and now minimally processed condensate, also can be sold overseas and are not covered by the oil export ban.

The Commerce Department's Bureau of Industry and Security recently told two Texas companies that if an ultralight oil called condensate is stabilized and lightly distilled, it can be considered a petroleum product free to export.

Existing policy provides additional openings.

Federal regulations say the bureau will consider other kinds of applications to export crude on a case-by-case basis, including temporary exports, exchanges with adjacent countries, and swaps that will directly result in the U.S. importing an equal or greater quantity and quality of crude and can be proved to involve supplies that "cannot reasonably be marketed in the United States."

Sen. Lisa Murkowski, R-Alaska, has argued that the marketing provision could apply to light sweet crude, and that surging production could overwhelm U.S. refiners' capacity to process it.

Opening a door

Frank Verrastro, a senior vice president at the Center for Strategic and International Studies, said the provision opens the door for a highly targeted swap proposal to export light crude.

"If someone put in a well-thought out application that said 'I've got this specific type of crude oil, this is my economics, I can't move it, no one will take it' - that it's unmarketable by that definition - it'd go," Verrastro predicted.

Most of the public focus so far has been on broader swaps that may have to satisfy the specific quality, quantity and marketability requirements outlined in export regulations. But Murkowski, who is in line to take the gavel of the Energy and Natural Resources Committee if Republicans takes control of the Senate, issued a paper prepared by panel staff in May touting the potential for more limited barrel-for-barrel oil exchanges with adjacent countries.

Latin America?

"Adjacent" countries historically have included Canada, Panama, and Mexico, but the paper suggests a more liberal interpretation could include other Latin American and Caribbean nations.

Still, exchanges with nearby nations and broader swaps are complex deals - possibly involving customers and suppliers in multiple countries - and traders have had trouble making the financials work under current prices.

Even if they could square the numbers, would-be oil exporters may have to assemble a deal - complete with signed purchase agreements - before asking the Bureau of Industry and Security for permission to conduct the transaction. The potentially cumbersome, slow-moving review process does not mesh with the swift decisions that markets and buyers may want.